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Key Issues for Seawater Desalination in California: Cost and Financing stand-by mode when these cheaper sources are available” (Kemp 2012). The desalination plant, which cost nearly $1.9 billion, is slated to go on stand-by mode in 2015. Experience in Santa Barbara, California and in Tampa Bay, Florida provides further evidence of demand risk. During the 1987-1992 drought, the City of Santa Barbara partnered with several local water agencies to build a seawater desalination plant. The plant was completed in March 1992, and shortly thereafter, the drought ended. The plant was eventually decommissioned as the cost to produce the water was too high to warrant use during non-drought periods. In addition, the high cost of building the plant and connecting to the State Water Project raised local water prices high enough to encourage substantial additional conservation, further decreasing need for the plant. Similarly, the Tampa Bay desalination plant in Florida was completed in 2008 in an effort to reduce groundwater pumping. Since it was built, that plant has operated far below its full capacity due to periodic operational issues with the plant, regional water demand reductions, and the availability of less expensive alternatives (see page 29 for more about the Tampa Bay plant). In some regions, seawater desalination can make an important contribution to the availability and reliability of water resources. However, it remains among the most expensive options available to meet water demands. Additionally, project proponents tend to develop large plants in an effort to capture economies of scale and reduce the unit cost of water. This tendency, however, can lead to oversized projects that ultimately increase demand risk and threaten the long-term viability of a project. How Are Seawater Desalination Projects Structured? Planning, designing, financing, constructing, and operating major water projects, such as desalination plants, can be challenging. Such projects are often accomplished by public agencies or through various types of public-private partnerships. The delivery of largescale water projects may involve different parties and stakeholders, including the owner, designers and engineers, construction contractors, operation contractors, external financiers, and consumers. The project delivery method determines how these multiple groups relate to one another. There is a range of project delivery methods; among the most common are: Design-Bid-Build (DBB) – traditional project delivery approach for municipal infrastructure projects by which the owner, i.e., the public water provider, determines that a project is needed and secures financing for the project; the owner works with an engineer to define the project and develop plans with detailed specifications; the owner then solicits bids from multiple contractors to construct the project; the contractor that provides the lowest bid that meets all of the criteria is selected; operations are performed by the owner or by a contract operator. 22
Key Issues for Seawater Desalination in California: Cost and Financing Design-Build (DB) – the owner develops the project concept and secures financing; the owner then hires a design-build team to construct the project for a lump sum fixed price or guaranteed maximum price; operations are performed by the owner or by a contract operator. Design-Build-Operate (DBO) – the owner develops the project concept and secures financing; the owner hires a single team responsible for the development, design, construction, and long-term operation of the project. Design-Build-Own-Operate-Transfer (DBOOT) – the contractor is responsible for the design, construction, and long-term operation of the project; unlike with the more traditional project delivery methods, the contractor must secure financing for the project and initially owns the facility; the water agency agrees to purchase the water at an agreed-upon price over a certain period (these purchase agreements allow the contractor to secure the necessary financing); the contract contains provisions for the transfer of ownership of the facility to the water provider on an agreed-upon date. Design-Build-Own-Operate (DBOO) – variation of the DBOOT delivery method; the contractor is responsible for the design, financing, construction, and long-term operation of the project; the water agency agrees to purchase the water at an agreed upon price over a certain period; unlike with a DBOOT, however, there is no asset transfer at the end of the project. Each project delivery method has advantages and disadvantages with respect to how risk is shared among parties, the length of the process, etc. Some of these advantages and disadvantages are described in Table 6. A key difference among the project delivery methods is the degree to which innovation is integrated into the project. The water sector has traditionally employed the DBB delivery model. With DBB, the public utility or agency (owner of the project) plays a central role, selecting different groups to design, construct, and possibly operate the project. DBB contracts are generally awarded based on the lowest cost (NRC 2008). Thus, there is often little incentive to implement innovative designs and technologies that may have a higher capital cost but reduce operating costs and result in a less expensive project overall. With a DBO delivery method, by contrast, the DBO contractor is responsible for operation of the project. Thus, the contractor has an incentive to promote innovative designs and technologies that can optimize and improve the operability of the project. Another key difference among the various project delivery methods is the party required to secure financing. Under the DBB, DB, and DBO delivery methods, the water provider secures project financing, largely by issuing debt (bonds or loans). Under the DBOO and DBOOT delivery methods, by contrast, the contractor secures financing by issuing debt and/or obtaining private equity. One of the possible drawbacks in using this approach, however, is the high cost of private capital, which may be reflected in the price of desalinated water. For example, the Carlsbad desalination project will be financed using 23
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